TBApp 12 A

Appendix 12A
The Direct Method of Determining the Net Cash Provided by Operating

Activities
True / False Questions
1. Under the direct method of determining the net cash provided by operating activities on the statement of
cash flows, a decrease in prepaid expenses would be added to selling and administrative expenses to
convert selling and administrative expenses to a cash basis.
True False
cash flows, one step in adjusting selling and administrative expenses from an accrual to a cash basis is to
subtract any increase in prepaid expenses.
True False
3. If accounts receivable increase during a period, then the amount of cash collected from customers will be
less than the amount of sales reported on the income statement for the period.
True False
cash flows, an increase in accounts receivable would be added to sales revenue to convert revenue to a cash
basis.
True False
Multiple Choice Questions
5. During the year the balance in the Accounts Receivable account increased by $6,000. In order to adjust the
company's net income to a cash basis using the direct method on the statement of cash flows, it would be
necessary to:
A. subtract the $6,000 from the sales revenue reported on the income statement.
B. add the $6,000 to the sales revenue reported on the income statement.
C. subtract the $6,000 from the cost of goods sold reported on the income statement.
D. add the $6,000 to the cost of goods sold reported on the income statement.
12-1
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6. Evita Corporation prepares its statement of cash flows using the indirect method. Evita's statement showed
"Net cash provided by operating activities" of $46,000. Under the direct method, this number would have
been:
A. $0.
B. $46,000.
C. greater than $46,000.
D. less than $46,000 but greater than $0.
7. During the year the balance in the Prepaid Expenses account increased by $6,000. In order to adjust the
company's net income to a cash basis using the direct method on the statement of cash flows, it would be
necessary to:
A. subtract the $6,000 from the selling and administrative expenses reported on the income statement.
B. add the $6,000 to the selling and administrative expenses reported on the income statement.
12-2
8. Brew Corporation's most recent comparative balance sheet and income statement appear below:
Comparative Balance Sheet

Ending Balance Beginning Balance
Assets
Current assets:
Cash and cash equivalents $47 $39
Accounts receivable 38 35
Inventory 68 61
Total current assets 153 135
Property, plant, and equipment 600 500
Less accumulated depreciation 397 332
Net property, plant, and equipment 203 168
Total assets $356 $303
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $59 $63
Total current liabilities 59 63
Bonds payable 219 260
Total liabilities 278 323
Stockholders’ equity:
Common stock 71 70
Retained earnings 7 (90)
Total stockholders’ equity 78 (20)
Total liabilities and stockholders' equity $356 $303
Income Statement
Sales $975
Cost of goods sold 619
Gross margin 356
Selling and administrative expense 165
Net operating income 191
Income taxes 57
Net income $134
Cash dividends were $37. The company did not retire or sell any property, plant, and equipment during the
year. The net cash provided by (used in) operating activities for the year was:
A. $185
B. $51
C. $83
D. $191
12-3
9. Last year Lawn Corporation reported sales of $115,000 on its income statement. During the year, accounts
receivable decreased by $10,000 and accounts payable increased by $15,000. The company uses the direct
method to determine the net cash provided by operating activities on the statement of cash flows. The sales
revenue adjusted to a cash basis for the year would be:
A. $125,000
B. $90,000
C. $140,000
D. $100,000
10. Reven Corporation prepares its statement of cash flows using the direct method. Last year, Reven reported
Income Tax Expense of $25,000. At the beginning of last year, Reven had a $5,000 balance in the Income
Taxes Payable account. At the end of last year, Reven had a $9,000 balance in the account. On its statement
of cash flows for last year, what amount should Reven have shown for its Income Tax Expense adjusted to
a cash basis (i.e., income taxes paid)?
A. $29,000
B. $21,000
C. $25,000
D. $4,000
12-4
11. Dorris Corporation's balance sheet and income statement appear below:

Assets
Current assets:
Inventory 52 44
Accrued liabilities 16 19
Income taxes payable 42 42
Bonds payable 76 70
Common stock 45 40
Retained earnings 190 161
Total stockholders’ equity 235 201
Income Statement
Sales $587
Gross margin 202
Gain on sale of plant and equipment 16
Income before taxes 51
Income taxes 15
Net income $36
Cash dividends were $7. The company sold equipment for $18 that was originally purchased for $8 and
that had accumulated depreciation of $6. The net cash provided by (used in) operating activities for the year
was:
12-5
A. $34
B. $35
C. $50
D. $41
12. The ending balance of accounts receivable was $69,000. Sales, adjusted to a cash basis using the direct
method on the statement of cash flows, were $354,000. Sales reported on the income statement were
$378,000. Based on this information, the beginning balance in accounts receivable was:
A. $93,000
B. $24,000
C. $94,000
D. $45,000
13. Kuma, Inc. had cost of goods sold of $106,000 for the just completed year. Shown below are the beginning
and ending balances of various Kuma accounts:
Ending Beginning
Cash $59,000 $45,000
Accounts receivable $75,000 $81,000
Inventory $36,000 $42,000
Accounts payable $18,000 $14,000
Retained earnings $79,000 $64,000
Kuma prepares its statement of cash flows using the direct method. On its statement of cash flows, what
amount should Kuma show for its cost of goods sold adjusted to a cash basis (i.e., cash paid to suppliers)?
A. $100,000
B. $96,000
C. $102,000
D. $116,000
14. Sales reported on the income statement totaled $750,000. The beginning balance in accounts receivable
was $70,000. The ending balance in accounts receivable was $80,000. Under the direct method of
determining the net cash provided by operating activities on the statement of cash flows, sales adjusted to a
cash basis are:
A. $760,000
B. $740,000
C. $680,000
D. $830,000
12-6
15. Wister Corporation had net sales of $462,000 for the just completed year. Shown below are the beginning
and ending balances of various Wister accounts:
Ending Beginning
Cash $105,000 $132,000
Inventory $472,000 $536,000
Wister prepares its statement of cash flows using the direct method. On its statement of cash flows, what
amount should Wister show for its net sales adjusted to a cash basis (i.e., cash received from sales)?
A. $488,000
B. $436,000
C. $462,000
D. $445,000
16. LFM Corporation reported cost of goods sold on its income statement of $15,000. The following account
balances appeared on the company's comparative balance sheet for the same year:

Inventory $33,000 $30,000
Accounts Payable $23,000 $21,000
The company uses the direct method to determine the net cash provided by operating activities. The cost of
goods sold, adjusted to a cash basis, on the company's statement of cash flows for the year would be:
A. $14,000
B. $16,000
C. $10,000
D. $15,000
17. Cridberg Corporation's selling and administrative expenses for last year totaled $260,000. During the year
the company's prepaid expense account balance increased by $18,000 and accrued liabilities decreased by
$12,000. Depreciation for the year was $25,000. Based on this information, selling and administrative
expenses adjusted to a cash basis under the direct method on the statement of cash flows would be:
A. $255,000
B. $315,000
C. $205,000
D. $265,000
12-7
18. Last year Cumberland Corporation reported a cost of goods sold of $120,000. Inventories increased by
$35,000 during the year, and accounts payable increased by $20,000. The company uses the direct method
to determine the net cash provided by operating activities on the statement of cash flows. The cost of goods
sold adjusted to a cash basis would be:
A. $135,000
B. $100,000
C. $155,000
D. $105,000
19. Crossland Corporation reported sales on its income statement of $435,000. On the statement of cash flows,
which used the direct method, sales adjusted to a cash basis were $455,000. Crossland Corporation reported
the following account balances on its balance sheet for the year:
Ending Beginning
Balance Balance
Accounts receivable $30,000 ?
Prepaid expenses $14,000 $11,000
Inventory $18,000 $20,000
Based on this information, the beginning balance in accounts receivable was:
A. $50,000
B. $40,000
C. $30,000
D. $20,000
12-8
20. The most recent balance sheet and income statement of Dallavalle Corporation appear below:

Assets
Current assets:
Inventory 55 50
Bonds payable 16 20
Common stock 43 40
Income Statement
Sales $649
Gross margin 235
Income taxes 23
Net income $54
Cash dividends were $12. The company did not retire or sell any property, plant, and equipment during the
year. The net cash provided by (used in) operating activities for the year was:
A. $77
12-9
B. $68
C. $40
D. $14
21. Last year Anderson Corporation reported a cost of goods sold of $100,000. The company's inventory at the
beginning of the year was $11,000, and its inventory at the end of the year was $19,000. The prepaid
expense account increased by $2,000 between the beginning and end of the year, and the accounts payable
account decreased by $4,000. Cost of goods sold adjusted to the cash basis under the direct method would
be:
A. $94,000
B. $106,000
C. $112,000
D. $110,000
22. Last year Marton Corporation reported a cost of goods sold of $720,000 on its income statement. The
following additional data were taken from the company's comparative balance sheet for the year:
Ending Beginning
Inventory $105,000 $85,000
The company uses the direct method to determine the net cash provided by operating activities on the
statement of cash flows. The cost of goods sold adjusted to a cash basis would be:
A. $740,000
B. $767,000
C. $747,000
D. $673,000
12-10
23. Shimko Corporation's most recent comparative balance sheet and income statement appear below:

Assets:
Inventory 59 55
Property, plant and equipment 447 390
Liabilities and stockholders’ equity:
Common stock 21 20
Total liabilities and equity $365 $321
Income Statement
Sales $891
Gross margin 352
Income taxes 47
Net income $110
The company paid a cash dividend of $19 and it did not dispose of any property, plant, and equipment. The
company did not issue any bonds payable or repurchase any of its own common stock. The following
questions pertain to the company's statement of cash flows.
The net cash provided by (used in) operating activities for the year was:
A. $23
B. $133
C. $157
D. $87
12-11

Assets:
Inventory 59 55
Common stock 21 20
Income Statement
Sales $891
Gross margin 352
Income taxes 47
Net income $110
The net cash provided by (used in) investing activities for the year was:
A. $57
B. ($57)
C. $33
D. ($33)
12-12

Assets:
Inventory 59 55
Common stock 21 20
Income Statement
Sales $891
Gross margin 352
Income taxes 47
Net income $110
The net cash provided by (used in) financing activities for the year was:
A. ($19)
B. ($53)
C. $1
D. ($71)
12-13
26. The most recent balance sheet and income statement of Oldaker Corporation appear below:

Assets:
Inventory 44 45
Common stock 33 30
Total liabilities and stockholders’ equity $623 $501
Income Statement
Sales $921
Gross margin 346
Income taxes 69
Net income $160
company did not retire any bonds payable or repurchase any of its own common stock. The following
A. $168
B. $8
C. $152
D. $229
12-14

Assets:
Inventory 44 45
Common stock 33 30
Income Statement
Sales $921
Gross margin 346
Income taxes 69
Net income $160
A. ($127)
B. ($138)
C. $138
D. $127
12-15

Assets:
Inventory 44 45
Common stock 33 30
Income Statement
Sales $921
Gross margin 346
Income taxes 69
Net income $160
A. ($42)
B. $3
C. $11
D. ($28)
12-16
29. Kilduff Corporation's balance sheet and income statement appear below:

Assets:
Inventory 49 55
Common stock 32 30
Income Statement
Sales $1,174
Gross margin 403
Gain on sale of equipment 14
Income taxes 81
Net income $190
The company sold equipment for $19 that was originally purchased for $10 and that had accumulated
depreciation of $5. The company paid a cash dividend of $44 and it did not issue any bonds payable or
repurchase any of its own common stock.
A. $187
B. $231
C. $257
D. $201
12-17

Assets:
Inventory 49 55
Common stock 32 30
Income Statement
Sales $1,174
Gross margin 403
Income taxes 81
Net income $190
A. $19
B. ($118)
C. ($137)
D. $118
12-18

Assets:
Inventory 49 55
Common stock 32 30
Income Statement
Sales $1,174
Gross margin 403
Income taxes 81
Net income $190
A. ($44)
B. ($71)
C. $2
D. ($29)
12-19
32. The change in each of Kendall Corporation's balance sheet accounts last year follows:
Increase Decrease
Cash $3,000
Accounts Receivable $2,000
Inventory $3,000
Prepaid Expenses $4,000
Long-term Investments $15,000
Property, Plant and Equipment $10,000
Accumulated Depreciation $8,000
Accounts Payable $9,000
Accrued Liabilities $6,000
Bonds Payable $13,000
Common Stock $5,000
Retained Earnings $4,000
Kendall Corporation's income statement for the year was:
Sales $300,000
Cost of goods sold 180,000
Gross margin 120,000
Selling and administrative expense 116,000
Net income $4,000
There were no sales or retirements of property, plant, and equipment and no dividends paid during the
year. The company pays no income taxes and it did not purchase any long-term investments, issue any
bonds payable, or repurchase any of its own common stock. The net cash provided by operating activities
on the statement of cash flows is determined using the direct method.
Using the direct method, sales adjusted to a cash basis would be:
A. $300,000
B. $302,000
C. $298,000
D. $305,000
12-20
Increase Decrease
Cash $3,000
Inventory $3,000
Common Stock $5,000
Sales $300,000
Net income $4,000
Using the direct method, the cost of goods sold adjusted to a cash basis would be:
A. $180,000
B. $174,000
C. $177,000
D. $186,000
12-21
Increase Decrease
Cash $3,000
Inventory $3,000
Common Stock $5,000
Sales $300,000
Net income $4,000
The selling and administrative expense adjusted to a cash basis would be:
A. $120,000
B. $106,000
C. $110,000
D. $112,000
12-22
Increase Decrease
Cash $3,000
Inventory $3,000
Common Stock $5,000
Sales $300,000
Net income $4,000
The net cash provided (used) by investing activities would be:
A. $15,000
B. ($10,000)
C. ($8,000)
D. $5,000
12-23
Increase Decrease
Cash $3,000
Inventory $3,000
Common Stock $5,000
Sales $300,000
Net income $4,000
There were no sales or retirements of property, plant, and equipment and no dividends paid during the year.
The company pays no income taxes and it did not purchase any long-term investments, issue any bonds
payable, or repurchase any of its own common stock. The net cash provided by operating activities on the
statement of cash flows is determined using the direct method.
The net cash provided (used) by financing activities would be:
A. ($8,000)
B. ($13,000)
C. $20,000
D. ($3,000)
12-24
37. The changes in Northrup Corporation's balance sheet account balances for last year appear below:
Increases
(Decreases)
Asset and Contra-Asset Accounts:
Cash $4,000
Accounts receivable ($4,000)
Inventory ($2,000)
Prepaid expenses $2,000
Long-term investments $40,000
Property, plant and equipment $25,000
Accumulated depreciation $68,000
Liability and Equity Accounts:
Accounts payable ($6,000)
Accrued liabilities $8,000
Income taxes payable ($8,000)
Bonds payable ($70,000)
Common stock $10,000
Retained earnings $63,000
The company's income statement for the year appears below:
Income Statement
Sales $980,000
Net operating income 130,000
Income taxes 39,000
Net income $91,000
The company declared and paid $28,000 in cash dividends during the year. It did not dispose of any
property, plant, and equipment during the year. The company uses the direct method to determine the net
cash provided by operating activities.
On the statement of cash flows, the sales adjusted to a cash basis would be:
A. $976,000
B. $982,000
C. $984,000
D. $980,000
12-25
Increases
(Decreases)
Cash $4,000
Inventory ($2,000)
Income Statement
Sales $980,000
Income taxes 39,000
Net income $91,000
On the statement of cash flows, the cost of goods sold adjusted to a cash basis would be:
A. $546,000
B. $536,000
C. $544,000
D. $540,000
12-26
Increases
(Decreases)
Cash $4,000
Inventory ($2,000)
Income Statement
Sales $980,000
Income taxes 39,000
Net income $91,000
On the statement of cash flows, the selling and administrative expense adjusted to a cash basis would be:
A. $304,000
B. $384,000
C. $310,000
D. $236,000
12-27
Increases
(Decreases)
Cash $4,000
Inventory ($2,000)
Income Statement
Sales $980,000
Income taxes 39,000
Net income $91,000
On the statement of cash flows, the income tax expense adjusted to a cash basis would be:
A. $47,000
B. $39,000
C. $31,000
D. $49,000
12-28
41. Last year, Knox Corporation reported on its income statement sales of $375,000 and cost of goods sold of
$140,000. During the year, the balance in accounts receivable increased $30,000, the balance in accounts
payable decreased $25,000, and the balance in inventory increased $10,000. The company uses the direct
method to determine the net cash provided by operating activities on its statement of cash flows.
Under the direct method, sales adjusted to a cash basis would be:
A. $295,000
B. $345,000
C. $405,000
D. $355,000
42. Last year, Knox Corporation reported on its income statement sales of $375,000 and cost of goods sold of
$140,000. During the year, the balance in accounts receivable increased $30,000, the balance in accounts
payable decreased $25,000, and the balance in inventory increased $10,000. The company uses the direct
method to determine the net cash provided by operating activities on its statement of cash flows.
Under the direct method, cost of goods sold adjusted to a cash basis would be:
A. $105,000
B. $125,000
C. $175,000
D. $155,000
12-29
43. Van Beeber Corporation's comparative balance sheet and income statement for last year appear below:

Cash $58,000 $34,000
Accounts receivable 48,000 36,000
Inventory 56,000 67,000
Prepaid expenses 24,000 16,000
Long-term investments 280,000 220,000
Property, plant and equipment 580,000 580,000
Less accumulated depreciation 270,000 235,000
Total assets $776,000 $718,000
Accrued liabilities 38,000 21,000
Income taxes payable 61,000 31,000
Bonds payable 90,000 120,000
Common stock 80,000 60,000
Retained earnings 475,000 433,000
Total liabilities and stockholders’ equity $776,000 $718,000
Income Statement
Sales $700,000
Income taxes 39,000
Net income $91,000
The company declared and paid $49,000 in cash dividends during the year. It did not sell or retire any
A. $700,000
B. $688,000
C. $677,000
D. $712,000
12-30

Cash $58,000 $34,000
Inventory 56,000 67,000
Total assets $776,000 $718,000
Income Statement
Sales $700,000
Income taxes 39,000
Net income $91,000
A. $360,000
B. $350,000
C. $370,000
D. $381,000
12-31

Cash $58,000 $34,000
Inventory 56,000 67,000
Total assets $776,000 $718,000
Income Statement
Sales $700,000
Income taxes 39,000
Net income $91,000
On the statement of cash flows, the selling and administrative expense adjusted to a cash basis would be:
A. $201,000
B. $166,000
C. $254,000
D. $210,000
12-32

Cash $58,000 $34,000
Inventory 56,000 67,000
Total assets $776,000 $718,000
Income Statement
Sales $700,000
Income taxes 39,000
Net income $91,000
A. $39,000
B. $69,000
C. $9,000
D. $25,000
12-33
47. Hayward Corporation had net sales of $610,000 and cost of goods sold of $360,000 for the just completed
year. Shown below are the beginning and ending balances for the year of various accounts:
Ending Beginning
Cash $42,000 $31,000
Inventory $96,000 $83,000
The company prepares its statement of cash flows using the direct method.
On its statement of cash flows, what amount should Howard show for its net sales adjusted to a cash basis
(i.e., cash received from sales)?
A. $616,000
B. $623,000
C. $625,000
D. $595,000
48. Hayward Corporation had net sales of $610,000 and cost of goods sold of $360,000 for the just completed
year. Shown below are the beginning and ending balances for the year of various accounts:
Ending Beginning
Cash $42,000 $31,000
Inventory $96,000 $83,000
On its statement of cash flows, what amount should Howard show for its cost of goods sold adjusted to a
cash basis (i.e., cash paid to suppliers)?
A. $345,000
B. $366,000
C. $379,000
D. $373,000
Essay Questions
12-34
49.
Comparative balance sheets and the income statements for Ellis Corporation are presented below:

Ending Beginning
Balance Balance
Assets
Current assets:
Cash $45,000 $30,000
Accounts 38,000 40,000
receivable
Inventory 67,000 60,000
Total current 150,000 130,000
assets
Long-term 162,000 200,000
investments
Property, plant 278,000 150,000
and equipment
Less 52,000 50,000
accumulated
depreciation
Total assets $538,000 $430,000
Liabilities
and
stockholders'
equity
Current
liabilities:
Accounts $36,000 $40,000
payable
Accrued 24,000 30,000
liabilities
Income 15,000 20,000
taxes payable
liabilities
Total 195,000 120,000
liabilities
Stockholders'
equity:
Common 295,000 270,000
stock
Retained 48,000 40,000
earnings
Total 343,000 310,000
stockholders'
equity
Total $538,000 $430,000
12-35
liabilities and
stockholders'
equity
Income Statement
Sales $150,000
Costs of goods 76,500
sold
Gross margin 73,500
Selling and 16,000
administrative
expense
Net operating 57,500
income
Loss on sale of 2,500
investment
Income before 55,000
taxes
Income taxes 22,000
Net income $33,000
The following additional information is available for the year:
* During the year, the company sold long-term investments for $35,500 that had been purchased for
$38,000.
* The company did not sell any property, plant, and equipment during the year or repurchase any of its
own common stock.
* All sales were on credit.
* The company paid a cash dividend of $25,000.
* The company paid cash to retire $15,000 of bonds payable.
Required:
a. Using the indirect method, determine the net cash provided by operating activities.
b. Using the direct method, determine the net cash provided by operating activities.
c. Using the net cash provided by operating activities amount from either part a or b, prepare a statement of
cash flows.
12-36
12-37
50.
Harkey Corporation's balance sheet and income statement appear below:

Ending Balance Beginning
Balance
Assets:
Cash and cash $32 $35
equivalents
Accounts 74 71
receivable
Inventory 41 42
Property, 443 370
plant and
equipment
Less 194 164
accumulated
depreciation
Liabilities and
stockholders'
equity:
Accounts $26 $28
payable
Accrued 28 25
liabilities
Income taxes 40 36
payable
Bonds 120 170
payable
Common 83 80
stock
Retained 99 15
earnings
Total $396 $354
liabilities and
stockholders'
equity
Income Statement
Sales $923
Cost of goods 604
sold
Gross margin 319
Selling and 169
administrative
12-38
expense
Net operating 150
income
Gain on sale of 11
equipment
Income before 161
taxes
Income taxes 48
Net income $113
that had accumulated depreciation of $2.
Required:
Using the direct method, determine the net cash provided by operating activities.
12-39
51.
Maloney Corporation's balance sheet and income statement appear below:

Balance
Assets:
equivalents
Accounts 44 49
receivable
Inventory 38 40
Property, 646 500
plant and
equipment
Less 273 260
accumulated
depreciation
Liabilities and
stockholders'
equity:
Accounts $65 $64
payable
Accrued 22 25
liabilities
Income taxes 33 35
payable
Bonds 72 70
payable
Common 73 70
stock
Retained 216 87
earnings
Total $481 $351
liabilities and
stockholders'
equity
Income Statement
Sales $1,059
Cost of goods 698
sold
Gross margin 361
Selling and 117
administrative
12-40
expense
Net operating 244
income
Income taxes 73
Net income $171
Cash dividends were $42. The company did not dispose of any property, plant, and equipment during the
year.
Required:
Prepare the operating activities section of the statement of cash flows using the direct method.
12-41
52.
Carson Corporation's comparative balance sheet and income statement for last year appear below:

Cash $20,000 $15,000
Inventory 32,000 35,000
Total assets $182,000 $180,000
Total liabilities and stockholders' equity $182,000 $180,000
Income Statement
Sales $200,000
Gain on sale of investments 2,000
Income before taxes 50,000
Income taxes 20,000
Net income $30,000
Carson did not dispose of any property, plant, and equipment during the year. It constructs its statement of
cash flows using the direct method.
Required:
Using the direct method, prepare in good form the operating activities section of the statement of cash
flows.
12-42
12-43
53.
The changes in each balance sheet account for Carver Corporation during the year just completed are as
follows:
Increase Decrease
Cash $3,000
Accounts $5,000
receivable
Inventory $6,000
Prepaid $3,000
expenses
Long-term $17,000
investments
Property, $11,000
plant and
equipment
Accumulated $9,000
depreciation
Accounts $8,000
payable
Accrued $5,000
liabilities
Bonds $12,000
payable
Common $3,000
stock
Retained $2,000
earnings
Carver Corporation's income statement for the year just ended shows the following:
Sales $350,000
Selling and 158,000
administrative expense
Net income $2,000
The company did not dispose of any property, plant, and equipment, buy any long-term investments, issue
any bonds payable, or repurchase any of its own common stock during the year. Carver Corporation uses
the direct method to construct its statement of cash flows.
Required:
12-44
a. Determine the sales adjusted to the cash basis.
b. Determine the cost of goods sold adjusted to the cash basis.
c. Determine the selling and administrative expenses adjusted to a cash basis.
d. Determine the net cash provided (used) by operating activities.
e. Determine the net cash provided (used) by investing activities.
f. Determine the net cash provided (used) by financing activities.
12-45
54.
Carr Corporation's comparative balance sheet and income statement for last year appear below:

Ending Beginning
Balance Balance
Cash $3,000 $23,000
Accounts 83,000 71,000
receivable
Inventory 39,000 47,000
Prepaid 9,000 15,000
expenses
Long-term 240,000 200,000
investments
Property, 515,000 480,000
plant and
equipment
Less 320,000 295,000
accumulated
depreciation
Total assets $569,000 $541,000
Accounts $9,000 $25,000
payable
Accrued 24,000 17,000
liabilities
Income taxes 49,000 46,000
payable
Bonds 160,000 200,000
payable
Common 170,000 140,000
stock
Retained 157,000 113,000
earnings
Total $569,000 $541,000
liabilities and
stockholders'
equity
Income Statement
Sales $850,000
Cost of goods 450,000
sold
Selling and 270,000
administrative
expense
12-46
income
Income taxes 39,000
Net income $91,000
property, plant, and equipment during the year.
Required:
Construct in good form the operating activities section of the company's statement of cash flows for the
year using the direct method.
12-47
55.
Digby Corporation's balance sheet and income statement appear below:

Balance
Assets:
Inventory 34 38
Liabilities and stockholders'
equity:
Common stock 43 40
Total liabilities and $401 $293
stockholders' equity
Income Statement
Sales $1,075
Gross margin 421
Selling and administrative 185
expense
Income taxes 71
Net income $165
Cash dividends were $29. The company did not dispose of any property, plant, and equipment during the
year.
Required:
Prepare the operating activities section of the statement of cash flows in good form using the direct
method.
12-48
12-49
56.
Freeport Corporation's income statement for last year appears below:
Income Statement
Sales $300,000
sold
Selling and 60,000
administrative
expense
income taxes
Income taxes 16,000
Net income $24,000
The beginning and ending balances for last year are available for the following selected accounts (the
company did not dispose of any property, plant, and equipment during the year):
Ending Beginning
Balance Balance
Accounts $32,000 $40,000
receivable
Inventory $60,000 $50,000
Prepaid $12,000 $8,000
expenses
Accumulated $40,000 $30,000
depreciation
Accounts $30,000 $45,000
payable
Accrued $16,000 $10,000
liabilities
Income taxes $2,000 $5,000
payable
Required:
flows.
12-50
12-51
Appendix 12A The Direct Method of Determining the Net Cash Provided by
Operating Activities Answer Key
True / False Questions
cash flows, a decrease in prepaid expenses would be added to selling and administrative expenses to
convert selling and administrative expenses to a cash basis.
FALSE
AACSB: Reflective Thinking

AICPA: BB Critical Thinking
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 12-04 (Appendix 12A) Use the direct method to determine the net cash provided by operating activities.
Level of Difficulty: 2 Medium
Topic Area: Appendix 12A: The Direct Method of Determining the Net Cash Provided by Operating Activities
cash flows, one step in adjusting selling and administrative expenses from an accrual to a cash basis is
to subtract any increase in prepaid expenses.
FALSE

Blooms: Remember
3. If accounts receivable increase during a period, then the amount of cash collected from customers will
be less than the amount of sales reported on the income statement for the period.
TRUE

Blooms: Understand
cash flows, an increase in accounts receivable would be added to sales revenue to convert revenue to a
cash basis.
FALSE
12-52
Blooms: Remember
Multiple Choice Questions
5. During the year the balance in the Accounts Receivable account increased by $6,000. In order to adjust
the company's net income to a cash basis using the direct method on the statement of cash flows, it
would be necessary to:
A. subtract the $6,000 from the sales revenue reported on the income statement.
B. add the $6,000 to the sales revenue reported on the income statement.

Blooms: Understand
6. Evita Corporation prepares its statement of cash flows using the indirect method. Evita's statement
showed "Net cash provided by operating activities" of $46,000. Under the direct method, this number
would have been:
A. $0.
B. $46,000.
C. greater than $46,000.
D. less than $46,000 but greater than $0.

Blooms: Understand
Level of Difficulty: 1 Easy
12-53
7. During the year the balance in the Prepaid Expenses account increased by $6,000. In order to adjust the
company's net income to a cash basis using the direct method on the statement of cash flows, it would
be necessary to:
A. subtract the $6,000 from the selling and administrative expenses reported on the income statement.
B. add the $6,000 to the selling and administrative expenses reported on the income statement.

Blooms: Understand
12-54
8. Brew Corporation's most recent comparative balance sheet and income statement appear below:

Assets
Current assets:
Inventory 68 61
Common stock 71 70
Total stockholders’ equity 78 (20)
Income Statement
Sales $975
Gross margin 356
Income taxes 57
Net income $134
Cash dividends were $37. The company did not retire or sell any property, plant, and equipment during
the year. The net cash provided by (used in) operating activities for the year was:
A. $185
B. $51
C. $83
D. $191
12-55
Sales (as reported) $975
Adjustments to a cash basis:
Increase in accounts receivable ($38 – $35) –3 $972
Cost of goods sold (as reported) 619
Increase in inventory ($68 – $61) +7
Decrease in accounts payable ($59 – $63) +4 630
Selling and administrative expense (as reported) 165
Depreciation ($397 – $332) –65 100
Income tax expense 57
Net cash provided by operating activities $185
AACSB: Analytical Thinking

Blooms: Apply
9. Last year Lawn Corporation reported sales of $115,000 on its income statement. During the year,
accounts receivable decreased by $10,000 and accounts payable increased by $15,000. The company
uses the direct method to determine the net cash provided by operating activities on the statement of
cash flows. The sales revenue adjusted to a cash basis for the year would be:
A. $125,000
B. $90,000
C. $140,000
D. $100,000
Sales (as reported) $115,000

Decrease in accounts receivable +10,000
Sales adjusted to a cash basis $125,000

Blooms: Apply
12-56
10. Reven Corporation prepares its statement of cash flows using the direct method. Last year, Reven
reported Income Tax Expense of $25,000. At the beginning of last year, Reven had a $5,000 balance in
the Income Taxes Payable account. At the end of last year, Reven had a $9,000 balance in the account.
On its statement of cash flows for last year, what amount should Reven have shown for its Income Tax
Expense adjusted to a cash basis (i.e., income taxes paid)?
A. $29,000
B. $21,000
C. $25,000
D. $4,000
Income tax expense (as reported) $25,000

Increase in income taxes payable ($9,000
–4,000
– $5,000)
Income tax expense adjusted to a cash basis $21,000

Blooms: Apply
12-57
11. Dorris Corporation's balance sheet and income statement appear below:

Assets
Current assets:
Inventory 52 44
Bonds payable 76 70
Common stock 45 40
Income Statement
Sales $587
Gross margin 202
Gain on sale of plant and equipment 16
Income taxes 15
Net income $36
that had accumulated depreciation of $6. The net cash provided by (used in) operating activities for the
year was:
12-58
A. $34
B. $35
C. $50
D. $41

Decrease in accounts receivable ($49 – $57) +8 $595
Decrease in accrued liabilities ($16 – $19) +3
Depreciation ($203 – $186 + $6) –23 147
Income tax expense (as reported)
No change in income taxes payable ($42 – $42) 0 15

Blooms: Apply
12-59
12. The ending balance of accounts receivable was $69,000. Sales, adjusted to a cash basis using the direct
method on the statement of cash flows, were $354,000. Sales reported on the income statement were
$378,000. Based on this information, the beginning balance in accounts receivable was:
A. $93,000
B. $24,000
C. $94,000
D. $45,000

Increase in accounts receivable –X
$378,000 - X = $354,000
X = $378,000 - $354,000 = $24,000
Increase in accounts receivable = Ending balance accounts receivable - Beginning balance accounts
receivable
$24,000 = $69,000 - Beginning balance accounts receivable
Beginning balance accounts receivable = $69,000 - $24,000 = $45,000

Blooms: Apply
Level of Difficulty: 3 Hard
12-60
13. Kuma, Inc. had cost of goods sold of $106,000 for the just completed year. Shown below are the
beginning and ending balances of various Kuma accounts:
Ending Beginning
Cash $59,000 $45,000
Inventory $36,000 $42,000
Kuma prepares its statement of cash flows using the direct method. On its statement of cash flows,
what amount should Kuma show for its cost of goods sold adjusted to a cash basis (i.e., cash paid to
suppliers)?
A. $100,000
B. $96,000
C. $102,000
D. $116,000
Cost of goods sold (as reported) $106,000

Decrease in inventory ($42,000 – $36,000) –6,000
Increase in accounts payable ($18,000 – $14,000) –4,000
Cost of goods sold adjusted to a cash basis $96,000

Blooms: Apply
12-61
14. Sales reported on the income statement totaled $750,000. The beginning balance in accounts receivable
was $70,000. The ending balance in accounts receivable was $80,000. Under the direct method of
determining the net cash provided by operating activities on the statement of cash flows, sales adjusted
to a cash basis are:
A. $760,000
B. $740,000
C. $680,000
D. $830,000

Increase in accounts receivable ($80,000 – $70,000) –10,000

Blooms: Apply
Level of Difficulty: 1 Easy
12-62
15. Wister Corporation had net sales of $462,000 for the just completed year. Shown below are the
beginning and ending balances of various Wister accounts:
Ending Beginning
Cash $105,000 $132,000
Inventory $472,000 $536,000
Wister prepares its statement of cash flows using the direct method. On its statement of cash flows,
what amount should Wister show for its net sales adjusted to a cash basis (i.e., cash received from
sales)?
A. $488,000
B. $436,000
C. $462,000
D. $445,000

Increase in accounts receivable ($168,000 – $142,000) –26,000

Blooms: Apply
12-63
16. LFM Corporation reported cost of goods sold on its income statement of $15,000. The following
account balances appeared on the company's comparative balance sheet for the same year:

Inventory $33,000 $30,000
Accounts Payable $23,000 $21,000
The company uses the direct method to determine the net cash provided by operating activities. The
cost of goods sold, adjusted to a cash basis, on the company's statement of cash flows for the year would
be:
A. $14,000
B. $16,000
C. $10,000
D. $15,000
Ending Beginning
Change
Balance Balance
Inventory $33,000 $30,000 +$3,000
Accounts
$23,000 $21,000 +$2,000
Payable

Increase in inventory +3,000
Increase in accounts payable –2,000

Blooms: Apply
12-64
17. Cridberg Corporation's selling and administrative expenses for last year totaled $260,000. During the
year the company's prepaid expense account balance increased by $18,000 and accrued liabilities
decreased by $12,000. Depreciation for the year was $25,000. Based on this information, selling and
administrative expenses adjusted to a cash basis under the direct method on the statement of cash flows
would be:
A. $255,000
B. $315,000
C. $205,000
D. $265,000
Selling and administrative expense (as reported) $260,000

Increase in prepaid expenses +18,000
Decrease in accrued liabilities +12,000
Depreciation –25,000
Selling and administrative expenses adjusted to a cash basis $265,000

Blooms: Apply
18. Last year Cumberland Corporation reported a cost of goods sold of $120,000. Inventories increased by
$35,000 during the year, and accounts payable increased by $20,000. The company uses the direct
method to determine the net cash provided by operating activities on the statement of cash flows. The
cost of goods sold adjusted to a cash basis would be:
A. $135,000
B. $100,000
C. $155,000
D. $105,000

Increase in accounts payable –20,000

Blooms: Apply
12-65
19. Crossland Corporation reported sales on its income statement of $435,000. On the statement of cash
flows, which used the direct method, sales adjusted to a cash basis were $455,000. Crossland
Corporation reported the following account balances on its balance sheet for the year:
Ending Beginning
Balance Balance
Accounts
$30,000 ?
receivable
Prepaid expenses $14,000 $11,000
Inventory $18,000 $20,000
Based on this information, the beginning balance in accounts receivable was:
A. $50,000
B. $40,000
C. $30,000
D. $20,000

Decrease in accounts receivable +X
$435,000 + X = $455,000
X = $455,000 - $435,000 = $20,000
Decrease in accounts receivable = Beginning balance accounts receivable - Ending balance accounts
receivable
$20,000 = Beginning balance accounts receivable - $30,000
Beginning balance accounts receivable = $20,000 + $30,000 = $50,000

Blooms: Apply
12-66
20. The most recent balance sheet and income statement of Dallavalle Corporation appear below:

Assets
Current assets:
Inventory 55 50
Bonds payable 16 20
Common stock 43 40
Income Statement
Sales $649
Gross margin 235
Income taxes 23
Net income $54
Cash dividends were $12. The company did not retire or sell any property, plant, and equipment during
the year. The net cash provided by (used in) operating activities for the year was:
A. $77
12-67
B. $68
C. $40
D. $14

Increase in accrued liabilities ($16 – $15) –1
Depreciation ($304 – $279) –25 132
Income tax expense (as reported) 23
Decrease in income taxes payable ($30 – $37) +7 30

Blooms: Apply
12-68
21. Last year Anderson Corporation reported a cost of goods sold of $100,000. The company's inventory at
the beginning of the year was $11,000, and its inventory at the end of the year was $19,000. The prepaid
expense account increased by $2,000 between the beginning and end of the year, and the accounts
payable account decreased by $4,000. Cost of goods sold adjusted to the cash basis under the direct
method would be:
A. $94,000
B. $106,000
C. $112,000
D. $110,000

Increase in inventory ($19,000 –
+8,000
$11,000)
Decrease in accounts payable +4,000

Blooms: Apply
12-69
22. Last year Marton Corporation reported a cost of goods sold of $720,000 on its income statement. The
following additional data were taken from the company's comparative balance sheet for the year:
Ending Beginning
Inventory $105,000 $85,000
The company uses the direct method to determine the net cash provided by operating activities on the
statement of cash flows. The cost of goods sold adjusted to a cash basis would be:
A. $740,000
B. $767,000
C. $747,000
D. $673,000
Ending Beginning Change

Inventory $105,000 $85,000 +$20,000
Accounts payable $65,000 $92,000 –$27,000


Blooms: Apply
12-70

Assets:
Inventory 59 55
Common stock 21 20
Income Statement
Sales $891
Gross margin 352
Income taxes 47
Net income $110
The company paid a cash dividend of $19 and it did not dispose of any property, plant, and equipment.
The company did not issue any bonds payable or repurchase any of its own common stock. The
following questions pertain to the company's statement of cash flows.
A. $23
B. $133
C. $157
D. $87
12-71
Increase in accounts receivable ($34 – $32) –2 $889
Increase in accounts payable ($37 – $32) –5 538
Depreciation ($212 – $188) –24 171
None 0 47

Blooms: Apply
12-72

Assets:
Inventory 59 55
Common stock 21 20
Income Statement
Sales $891
Gross margin 352
Income taxes 47
Net income $110
A. $57
B. ($57)
C. $33
D. ($33)
Investing activities:
Purchase of property, plant, and equipment ($447 – $390) ($57)
Net cash provided by (used in) investing activities ($57)
12-73
Blooms: Apply
Learning Objective: 12-01 Classify cash inflows and outflows as relating to operating, investing, or financing activities.
Topic Area: Organizing the Statement of Cash Flows
12-74

Assets:
Inventory 59 55
Common stock 21 20
Income Statement
Sales $891
Gross margin 352
Income taxes 47
Net income $110
A. ($19)
B. ($53)
C. $1
D. ($71)
Financing activities:
Repaying principal on bonds payable ($217 –
($53)
$270)
Issuance of common stock ($21 – $20) 1
12-75
Paying a dividend (19)
Net cash provided by (used in) financing
($71)
activities

Blooms: Apply
12-76

Assets:
Inventory 44 45
Common stock 33 30
Income Statement
Sales $921
Gross margin 346
Income taxes 69
Net income $160
The company did not retire any bonds payable or repurchase any of its own common stock. The
A. $168
B. $8
C. $152
D. $229
12-77
Decrease in inventory ($44 – $45) –1
Decrease in accrued liabilities ($21 – $22) +1
Depreciation ($253 – $242) –11 107
Decrease in income taxes payable ($26 – $28) +2 71

Blooms: Apply
12-78

Assets:
Inventory 44 45
Common stock 33 30
Income Statement
Sales $921
Gross margin 346
Income taxes 69
Net income $160
A. ($127)
B. ($138)
C. $138
D. $127
Purchase of property, plant, and equipment
($138)
($728 – $590)
12-79
Net cash provided by (used in) investing
($138)
activities

Blooms: Apply
12-80

Assets:
Inventory 44 45
Common stock 33 30
Income Statement
Sales $921
Gross margin 346
Income taxes 69
Net income $160
A. ($42)
B. $3
C. $11
D. ($28)
Issuance of bonds payable ($121 – $110) $11
12-81
($28)
activities

Blooms: Apply
12-82

Assets:
Inventory 49 55
Common stock 32 30
Income Statement
Sales $1,174
Gross margin 403
Income taxes 81
Net income $190
A. $187
B. $231
C. $257
D. $201

12-83
Increase in accounts receivable
–4 $1,170
($36 – $32)
Increase in accounts payable ($71 –
–7 758
$64)
Selling and administrative expense (as
146
reported)
Increase in accrued liabilities ($22
–3
– $19)
Depreciation ($316 – $315 + $5) –6 137
Decrease in income taxes payable
+7 88
($34 – $41)
Net cash provided by operating
$187
activities

Blooms: Apply
12-84

Assets:
Inventory 49 55
Common stock 32 30
Income Statement
Sales $1,174
Gross margin 403
Income taxes 81
Net income $190
A. $19
B. ($118)
C. ($137)
D. $118
12-85
Purchase of property, plant, and equipment ($707 – $580 + $10) ($137)
Sale of property, plant, and equipment 19
Net cash provided by (used in) investing activities ($118)

Blooms: Apply
12-86

Assets:
Inventory 49 55
Common stock 32 30
Income Statement
Sales $1,174
Gross margin 403
Income taxes 81
Net income $190
A. ($44)
B. ($71)
C. $2
D. ($29)
Repaying principal on bonds payable ($71 –
($29)
$100)
12-87
($71)
activities

Blooms: Apply
12-88
Increase Decrease
Cash $3,000
Inventory $3,000
Common Stock $5,000
Sales $300,000
Net income $4,000
bonds payable, or repurchase any of its own common stock. The net cash provided by operating
activities on the statement of cash flows is determined using the direct method.
Using the direct method, sales adjusted to a cash basis would be:
A. $300,000
B. $302,000
C. $298,000
D. $305,000

Increase in accounts receivable –2,000

Blooms: Apply
12-89
Increase Decrease
Cash $3,000
Inventory $3,000
Common Stock $5,000
Sales $300,000
Net income $4,000
Using the direct method, the cost of goods sold adjusted to a cash basis would be:
A. $180,000
B. $174,000
C. $177,000
D. $186,000

Decrease in inventory –3,000

12-90
Blooms: Apply
12-91
Increase Decrease
Cash $3,000
Inventory $3,000
Common Stock $5,000
Sales $300,000
Net income $4,000
The selling and administrative expense adjusted to a cash basis would be:
A. $120,000
B. $106,000
C. $110,000
D. $112,000
Selling and administrative expense (as

$116,000
reported)
Increase in accrued liabilities –6,000
Selling and administrative expense adjusted
$106,000
to a cash basis
12-92
Blooms: Apply
12-93
Increase Decrease
Cash $3,000
Inventory $3,000
Common Stock $5,000
Sales $300,000
Net income $4,000
The net cash provided (used) by investing activities would be:
A. $15,000
B. ($10,000)
C. ($8,000)
D. $5,000
Investing activities
Purchase of property, plant, and
($10,000)
equipment
Sale of long-term investments 15,000
Net cash provided by (used in) investing
$5,000
activities

Blooms: Apply
12-94
12-95
Increase Decrease
Cash $3,000
Inventory $3,000
Common Stock $5,000
Sales $300,000
Net income $4,000
The net cash provided (used) by financing activities would be:
A. ($8,000)
B. ($13,000)
C. $20,000
D. ($3,000)
Repaying principal on bonds payable ($13,000)
Issuance of common stock 5,000
($8,000)
activities

12-96
Blooms: Apply
12-97
Increases
(Decreases)
Cash $4,000
Inventory ($2,000)
Income Statement
Sales $980,000
Income taxes 39,000
Net income $91,000
property, plant, and equipment during the year. The company uses the direct method to determine the
net cash provided by operating activities.
A. $976,000
B. $982,000
C. $984,000
D. $980,000

12-98
Decrease in accounts receivable +4,000

Blooms: Apply
12-99
Increases
(Decreases)
Cash $4,000
Inventory ($2,000)
Income Statement
Sales $980,000
Income taxes 39,000
Net income $91,000
A. $546,000
B. $536,000
C. $544,000
D. $540,000

12-100
Decrease in inventory –2,000

Blooms: Apply
12-101
Increases
(Decreases)
Cash $4,000
Inventory ($2,000)
Income Statement
Sales $980,000
Income taxes 39,000
Net income $91,000
On the statement of cash flows, the selling and administrative expense adjusted to a cash basis would
be:
A. $304,000
B. $384,000
C. $310,000
D. $236,000
12-102
Increase in accrued liabilities –8,000
selling and administrative expense adjusted to a cash basis $236,000

Blooms: Apply
12-103
Increases
(Decreases)
Cash $4,000
Inventory ($2,000)
Income Statement
Sales $980,000
Income taxes 39,000
Net income $91,000
A. $47,000
B. $39,000
C. $31,000
D. $49,000
12-104
Increase in income taxes payable
Decrease in income taxes payable +8,000
Net cash provided by operating activities $47,000

Blooms: Apply
41. Last year, Knox Corporation reported on its income statement sales of $375,000 and cost of goods sold
of $140,000. During the year, the balance in accounts receivable increased $30,000, the balance in
accounts payable decreased $25,000, and the balance in inventory increased $10,000. The company uses
the direct method to determine the net cash provided by operating activities on its statement of cash
flows.
Under the direct method, sales adjusted to a cash basis would be:
A. $295,000
B. $345,000
C. $405,000
D. $355,000
Sales $375,000
Increase in accounts receivable –30,000

Blooms: Apply
12-105
42. Last year, Knox Corporation reported on its income statement sales of $375,000 and cost of goods sold
of $140,000. During the year, the balance in accounts receivable increased $30,000, the balance in
accounts payable decreased $25,000, and the balance in inventory increased $10,000. The company uses
the direct method to determine the net cash provided by operating activities on its statement of cash
flows.
Under the direct method, cost of goods sold adjusted to a cash basis would be:
A. $105,000
B. $125,000
C. $175,000
D. $155,000
Cost of goods sold $140,000


Blooms: Apply
12-106

Cash $58,000 $34,000
Inventory 56,000 67,000
Total assets $776,000 $718,000
Income Statement
Sales $700,000
Income taxes 39,000
Net income $91,000
A. $700,000
B. $688,000
C. $677,000
D. $712,000
12-107
Increase in accounts receivable ($48,000 – $36,000) -12,000

Blooms: Apply
12-108

Cash $58,000 $34,000
Inventory 56,000 67,000
Total assets $776,000 $718,000
Income Statement
Sales $700,000
Income taxes 39,000
Net income $91,000
A. $360,000
B. $350,000
C. $370,000
D. $381,000
12-109
Decrease in inventory ($56,000 – $67,000) -11,000
Decrease in accounts payable ($32,000 – $53,000) +21,000

Blooms: Apply
12-110

Cash $58,000 $34,000
Inventory 56,000 67,000
Total assets $776,000 $718,000
Income Statement
Sales $700,000
Income taxes 39,000
Net income $91,000
On the statement of cash flows, the selling and administrative expense adjusted to a cash basis would
be:
A. $201,000
B. $166,000
C. $254,000
D. $210,000
12-111
Increase in prepaid expenses ($24,000 – $16,000) -8,000
Increase in accrued liabilities ($38,000 – $21,000) -17,000
Depreciation ($270,000 – $235,000) -35,000
Selling and administrative expense adjusted to a cash basis $166,000

Blooms: Apply
12-112

Cash $58,000 $34,000
Inventory 56,000 67,000
Total assets $776,000 $718,000
Income Statement
Sales $700,000
Income taxes 39,000
Net income $91,000
A. $39,000
B. $69,000
C. $9,000
D. $25,000

12-113
Increase in income taxes payable
-30,000
($61,000 – $31,000)
Income tax expense adjusted to a cash basis $9,000

Blooms: Apply
47. Hayward Corporation had net sales of $610,000 and cost of goods sold of $360,000 for the just
completed year. Shown below are the beginning and ending balances for the year of various accounts:
Ending Beginning
Cash $42,000 $31,000
Inventory $96,000 $83,000
On its statement of cash flows, what amount should Howard show for its net sales adjusted to a cash
basis (i.e., cash received from sales)?
A. $616,000
B. $623,000
C. $625,000
D. $595,000

Increase in accounts receivable
–15,000
($87,000 – $72,000)
Net sales adjusted to a cash basis $595,000

Blooms: Apply
12-114
48. Hayward Corporation had net sales of $610,000 and cost of goods sold of $360,000 for the just
completed year. Shown below are the beginning and ending balances for the year of various accounts:
Ending Beginning
Cash $42,000 $31,000
Inventory $96,000 $83,000
On its statement of cash flows, what amount should Howard show for its cost of goods sold adjusted to
a cash basis (i.e., cash paid to suppliers)?
A. $345,000
B. $366,000
C. $379,000
D. $373,000

Increase in inventory ($96,000 – $83,000) +13,000
Decrease in accounts payable ($23,000 – $29,000) +6,000

Blooms: Apply
Essay Questions
12-115
49.
Comparative balance sheets and the income statements for Ellis Corporation are presented below:

Ending Beginning
Balance Balance
Assets
Current assets:
Cash $45,000 $30,000
Accounts 38,000 40,000
receivable
Inventory 67,000 60,000
assets
Long-term 162,000 200,000
investments
Property, plant 278,000 150,000
and equipment
Less 52,000 50,000
accumulated
depreciation
Total assets $538,000 $430,000
Liabilities
and
stockholders'
equity
Current
liabilities:
Accounts $36,000 $40,000
payable
Accrued 24,000 30,000
liabilities
Income 15,000 20,000
taxes payable
liabilities
Total 195,000 120,000
liabilities
Stockholders'
equity:
Common 295,000 270,000
stock
Retained 48,000 40,000
earnings
Total 343,000 310,000
stockholders'
equity
Total $538,000 $430,000
12-116
liabilities and
stockholders'
equity
Income Statement
Sales $150,000
Costs of goods 76,500
sold
Gross margin 73,500
Selling and 16,000
administrative
expense
income
Loss on sale of 2,500
investment
taxes
Income taxes 22,000
Net income $33,000
The following additional information is available for the year:
* During the year, the company sold long-term investments for $35,500 that had been purchased for
$38,000.
* The company did not sell any property, plant, and equipment during the year or repurchase any of its
own common stock.
* All sales were on credit.
* The company paid a cash dividend of $25,000.
* The company paid cash to retire $15,000 of bonds payable.
Required:
a. Using the indirect method, determine the net cash provided by operating activities.
b. Using the direct method, determine the net cash provided by operating activities.
c. Using the net cash provided by operating activities amount from either part a or b, prepare a
statement of cash flows.
a. Net cash provided by operating activities—indirect method.
12-117
Operating
activities
Net income $33,000
Adjustments to
convert to cash
basis
Depreciation $2,000
($52,000 –
$50,000)
Decrease in 2,000
accounts
receivable
($38,000 –
$40,000)
Increase in (7,000)
inventory
($67,000 –
$60,000)
Decrease in (4,000)
accounts payable
($36,000 –
$40,000)
Decrease in (6,000)
accrued
liabilities
($24,000 –
$30,000)
Decrease in (5,000)
income taxes
payable ($15,000
– $20,000)
Loss on sale 2,500 (15,500)
of investments
($35,500 –
$38,000)
Net cash $17,500
provided by
operating
activities
b. Net cash provided by operating activities—direct method.

Adjustments to cash basis:
Decrease in accounts receivable 2,000 $152,000
($38,000 – $40,000)
Cost of goods sold (as reported) 76,500
12-118
Increase in inventory ($67,000 – 7,000
$60,000)
Decrease in accounts payable 4,000 (87,500)
($36,000 – $40,000)
Selling and administrative expense (as 16,000
reported)
Decrease in accrued liabilities 6,000
($24,000 – $30,000)
Depreciation ($52,000 – $50,000) (2,000) (20,000)
Income tax expense (as reported) 22,000
Decrease in income taxes payable 5,000 (27,000)
($15,000 – $20,000)
Net cash provided by operating activities $17,500
c. Statement of cash flows.
Net cash $17,500

provided by
operating
activities
Investing
activities:
Sale of $35,500
long-term
investment
Purchase of
property, (128,000)
plant and
equipment
($278,000 –
$150,000)
Net cash (92,500)
provided by
investing
activities
Financing
activities:
Repaying (15,000)
principle on
bonds payable
Issuance of 105,000
bonds payable
($120,000 –
$30,000 –
$15,000)
Issuance of 25,000
12-119
common
stock
($295,000 –
$270,000)
Pay (25,000)
dividends to
shareholders
Net cash 90,000
provided by
financing
activities
Net increase 15,000
in cash
Beginning 30,000
balance cash
Ending $45,000
balance cash

Blooms: Apply
Learning Objective: 12-02 Prepare a statement of cash flows using the indirect method to determine the net cash provided by operating
activities.
Topic Area: An Example of a Statement of Cash Flows
12-120
50.
Harkey Corporation's balance sheet and income statement appear below:

Balance
Assets:
equivalents
Accounts 74 71
receivable
Inventory 41 42
Property, 443 370
plant and
equipment
Less 194 164
accumulated
depreciation
Liabilities and
stockholders'
equity:
Accounts $26 $28
payable
Accrued 28 25
liabilities
Income taxes 40 36
payable
Bonds 120 170
payable
Common 83 80
stock
Retained 99 15
earnings
Total $396 $354
liabilities and
stockholders'
equity
Income Statement
Sales $923
Cost of goods 604
sold
Gross margin 319
Selling and 169
administrative
12-121
expense
Net operating 150
income
Gain on sale of 11
equipment
Income before 161
taxes
Income taxes 48
Net income $113
Cash dividends were $29. The company sold equipment for $15 that was originally purchased for $6
and that had accumulated depreciation of $2.
Required:
Using the direct method, determine the net cash provided by operating activities.

Increase in accounts receivable ($74 –3 $920
– $71)
Decrease in accounts payable ($26 – +2 605
$28)
Selling and administrative expense (as 169
reported)
Increase in accrued liabilities ($28 – –3
$25)
Depreciation (($194 – $164) + $2) –32 134
Income taxes 48
Increase in income taxes payable –4 44
($40 – $36)
Net cash provided by operating $137
activities
12-122
Blooms: Apply
12-123
51.
Maloney Corporation's balance sheet and income statement appear below:

Balance
Assets:
equivalents
Accounts 44 49
receivable
Inventory 38 40
Property, 646 500
plant and
equipment
Less 273 260
accumulated
depreciation
Liabilities and
stockholders'
equity:
Accounts $65 $64
payable
Accrued 22 25
liabilities
Income taxes 33 35
payable
Bonds 72 70
payable
Common 73 70
stock
Retained 216 87
earnings
Total $481 $351
liabilities and
stockholders'
equity
Income Statement
Sales $1,059
Cost of goods 698
sold
Gross margin 361
Selling and 117
administrative
12-124
expense
Net operating 244
income
Income taxes 73
Net income $171
Cash dividends were $42. The company did not dispose of any property, plant, and equipment during
the year.
Required:
Prepare the operating activities section of the statement of cash flows using the direct method.
Sales (as $1,059

reported)
Adjustments to
a cash basis:
Decrease in +5 $1,064
accounts
receivable ($44
– $49)
Cost of goods 698
sold (as
reported)
Adjustments to
a cash basis:
Decrease in –2
inventory ($38
– $40)
Increase in –1 695
accounts
payable ($65 –
$64)
Selling and 117
administrative
expense (as
reported)
Adjustments to
a cash basis:
Decrease in +3
accrued
liabilities ($22
– $25)
12-125
Depreciation –13 107
($273 – $260)
Income taxes 73
Adjustments to
a cash basis:
Decrease in +2 75
income taxes
payable ($33 –
$35)
Net cash $187
provided by
operating
activities

Blooms: Apply
12-126
52.
Carson Corporation's comparative balance sheet and income statement for last year appear below:

Cash $20,000 $15,000
Inventory 32,000 35,000
Total assets $182,000 $180,000
Total liabilities and stockholders' $182,000 $180,000
equity
Income Statement
Sales $200,000
Gain on sale of investments 2,000
Income before taxes 50,000
Income taxes 20,000
Net income $30,000
Carson did not dispose of any property, plant, and equipment during the year. It constructs its statement
of cash flows using the direct method.
Required:
flows.
12-127
Sales (as $200,000
reported)
Adjustment to a
cash basis:
Increase in −2,000 $198,000
accounts
receivable
($27,000 –
$25,000)
sold (as
reported)
Adjustments to
a cash basis:
Decrease in −3,000
inventory
($32,000 –
$35,000)
Decrease in +8,000 105,000
accounts
payable
($30,000 –
$38,000)
Selling and 52,000
administrative
expense (as
reported)
Adjustments to
a cash basis:
Increase in +3,000
prepaid
expenses
($8,000 –
$5,000)
Depreciation −19,000 36,000
($49,000 –
$30,000)
Income tax 20,000
expense (as
reported)
Adjustment to a
cash basis:
Decrease in +18,000 38,000
income taxes
payable
($17,000 –
$35,000)
12-128
Net cash $19,000
provided by
operating
activities

Blooms: Apply
12-129
53.
The changes in each balance sheet account for Carver Corporation during the year just completed are as
follows:
Increase Decrease
Cash $3,000
Accounts $5,000
receivable
Inventory $6,000
Prepaid $3,000
expenses
Long-term $17,000
investments
Property, $11,000
plant and
equipment
Accumulated $9,000
depreciation
Accounts $8,000
payable
Accrued $5,000
liabilities
Bonds $12,000
payable
Common $3,000
stock
Retained $2,000
earnings
Carver Corporation's income statement for the year just ended shows the following:
Sales $350,000
Selling and 158,000
administrative expense
Net income $2,000
The company did not dispose of any property, plant, and equipment, buy any long-term investments,
issue any bonds payable, or repurchase any of its own common stock during the year. Carver
Corporation uses the direct method to construct its statement of cash flows.
Required:
12-130
a. Determine the sales adjusted to the cash basis.
b. Determine the cost of goods sold adjusted to the cash basis.
c. Determine the selling and administrative expenses adjusted to a cash basis.
d. Determine the net cash provided (used) by operating activities.
e. Determine the net cash provided (used) by investing activities.
f. Determine the net cash provided (used) by financing activities.
Requirements a through d:
Sales (as $350,000

reported)
Adjustments to a
cash basis:
Increase in –5,000 $345,000
accounts
receivable
sold (as reported)
Adjustments to a
cash basis:
Decrease in –6,000
inventory
Decrease in +8,000 192,000
accounts payable
Selling and 158,000
administrative
expense (as
reported)
Adjustments to a
cash basis:
Increase in +3,000
prepaid expenses
Increase in –5,000
accrued
liabilities
Depreciation –9,000 147,000
Net cash $6,000
provided by
operating
activities
12-131
e Investing
. activities:
Sale of $17,000
long-term
investment
Purchase (11,000)
of property,
plant, and
equipment
Net cash $6,000
provided by
investing
activities
f Financing
. activities:
Sale of $3,000
common
stock
Repaying (12,000)
principle on
bonds
payable
Net cash used ($9,000)
in financing
activities

Blooms: Apply
12-132
54.
Carr Corporation's comparative balance sheet and income statement for last year appear below:

Ending Beginning
Balance Balance
Cash $3,000 $23,000
Accounts 83,000 71,000
receivable
Inventory 39,000 47,000
Prepaid 9,000 15,000
expenses
Long-term 240,000 200,000
investments
Property, 515,000 480,000
plant and
equipment
Less 320,000 295,000
accumulated
depreciation
Total assets $569,000 $541,000
Accounts $9,000 $25,000
payable
Accrued 24,000 17,000
liabilities
Income taxes 49,000 46,000
payable
Bonds 160,000 200,000
payable
Common 170,000 140,000
stock
Retained 157,000 113,000
earnings
Total $569,000 $541,000
liabilities and
stockholders'
equity
Income Statement
Sales $850,000
sold
Selling and 270,000
administrative
expense
12-133
income
Income taxes 39,000
Net income $91,000
property, plant, and equipment during the year.
Required:
Construct in good form the operating activities section of the company's statement of cash flows for the
year using the direct method.
Sales (as $850,000

reported)
Adjustments to
a cash basis:
Increase in –12,000 $838,000
accounts
receivable
($83,000 –
$71,000)
sold (as
reported)
Adjustments to
a cash basis:
inventory
($39,000 –
$47,000)
Decrease in +16,000 458,000
accounts
payable
($9,000 –
$25,000)
Selling and 270,000
administrative
expense (as
reported)
Adjustments to
a cash basis:
12-134
prepaid
expenses
($9,000 –
$15,000)
Increase in −7,000
accrued
liabilities
($24,000 –
$17,000)
Depreciation –25,000 232,000
($320,000 –
$295,000)
Income tax 39,000
expense (as
reported)
Adjustments to
a cash basis:
Increase in −3,000 36,000
income taxes
payable
($49,000 –
$46,000)
Net cash $112,000
provided by
operating
activities

Blooms: Apply
12-135
55.
Digby Corporation's balance sheet and income statement appear below:

Balance
Assets:
Inventory 34 38
Liabilities and stockholders'
equity:
Common stock 43 40
Total liabilities and $401 $293
stockholders' equity
Income Statement
Sales $1,075
Gross margin 421
Selling and administrative 185
expense
Income taxes 71
Net income $165
Cash dividends were $29. The company did not dispose of any property, plant, and equipment during
the year.
Required:
Prepare the operating activities section of the statement of cash flows in good form using the direct
method.
12-136
Increase in accounts receivable ($76 – $65) –11 $1,064
Depreciation ($350 – $328) –22 163
Income taxes 71

Blooms: Apply
12-137
56.
Freeport Corporation's income statement for last year appears below:
Income Statement
Sales $300,000
sold
Selling and 60,000
administrative
expense
income taxes
Income taxes 16,000
Net income $24,000
The beginning and ending balances for last year are available for the following selected accounts (the
company did not dispose of any property, plant, and equipment during the year):
Ending Beginning
Balance Balance
Accounts $32,000 $40,000
receivable
Inventory $60,000 $50,000
Prepaid $12,000 $8,000
expenses
Accumulated $40,000 $30,000
depreciation
Accounts $30,000 $45,000
payable
Accrued $16,000 $10,000
liabilities
Income taxes $2,000 $5,000
payable
Required:
flows.
12-138
Sales (as $300,000
reported)
Adjustments to
a cash basis:
Decrease in +8,000 $308,000
accounts
receivable
($32,000 –
$40,000)
sold (as
reported)
Adjustments to
a cash basis:
Increase in +10,000
inventory
($60,000 –
$50,000)
Decrease in +15,000 225,000
accounts
payable
($30,000 –
$45,000)
Selling and 60,000
administrative
expense (as
reported)
Adjustments to
a cash basis:
Increase in +4,000
prepaid
expenses
($12,000 –
$8,000)
Increase in –6,000
accrued
liabilities
($16,000 –
$10,000)
Depreciation −10,000 48,000
($40,000 –
$30,000)
Income tax 16,000
expense (as
reported)
Adjustments to
a cash basis:
Decrease in +3,000 19,000
income taxes
payable ($2,000
12-139
– $5,000)
Net cash $16,000
provided by
operating
activities

Blooms: Apply
12-140

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Appendix 12A

The Direct Method of Determining the Net Cash Provided by Operating

True / False Questions

Multiple Choice Questions

Comparative Balance Sheet

Comparative Balance Sheet

Ending Balance Beginning Balance

Based on this information, the beginning balance in accounts receivable was:

Comparative Balance Sheet

Comparative Balance Sheet

Comparative Balance Sheet

Comparative Balance Sheet

Comparative Balance Sheet

Comparative Balance Sheet

Comparative Balance Sheet

Comparative Balance Sheet

Comparative Balance Sheet

Comparative Balance Sheet

Kendall Corporation's income statement for the year was:

Kendall Corporation's income statement for the year was:

Kendall Corporation's income statement for the year was:

Kendall Corporation's income statement for the year was:

The net cash provided (used) by investing activities would be:

Kendall Corporation's income statement for the year was:

The net cash provided (used) by financing activities would be:

The company's income statement for the year appears below:

The company's income statement for the year appears below:

The company's income statement for the year appears below:

The company's income statement for the year appears below:

Comparative Balance Sheet

Comparative Balance Sheet

Comparative Balance Sheet

Comparative Balance Sheet

Comparative Balance Sheet

The following additional information is available for the year:

Comparative Balance Sheet

Comparative Balance Sheet

Comparative Balance Sheet

Comparative Balance Sheet

Comparative Balance Sheet

True / False Questions

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

Multiple Choice Questions

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

Comparative Balance Sheet

AACSB: Analytical Thinking

Sales (as reported) $115,000

AACSB: Analytical Thinking

Income tax expense (as reported) $25,000

AACSB: Analytical Thinking

Comparative Balance Sheet

Sales (as reported) $587

AACSB: Analytical Thinking

Sales (as reported) $378,000

AACSB: Analytical Thinking

Cost of goods sold (as reported) $106,000

AACSB: Analytical Thinking

Sales (as reported) $750,000